The study was about the relationship between costing techniques and business profitability taking a case study of paramount Diaries ltd in Sokoto Metropolis. The study was guided by the objectives of: to establish the influence of costing techniques on business profitability, to establish the influence of costing techniques on business profitability and to recommend the possible ways for improving profitability level of paramount Diaries Limited. It used data collected using a questionnaire and interviews and during data collection purposive sampling was used. Both quantitative and qualitative research methodologies were also used as a sample size of 50 respondents was selected.
The study found out that the common costing technique used at paramount Diaries Limited include; job costing technique, process costing techniques as well as batch costing technique. Still, that costing techniques and profitability level at Paramount Dairies are significantly related. Lastly, the study revealed that government partnership, financial borrowing, reduction on tax, employees motivation, expansion of the production area, proper coordination with farmers, sell of non-defective products, giving of discounts, proper communication, employing of qualified staff and investment in market research are the possible ways for improving profitability level of paramount Diaries Limited
The study concludes that business organizations should employ workers who are qualified for improved financial performance, private firms in developing countries Nigeria in particular to always perform costing process, human resource to conceive and adhere costing techniques in a positive way as it is drafted and follow its contents in the day to day running of the firms’ activities, to operate on using of proper costing and that government to improve such infrastructures if organizations are to improve their profitability level.
Lastly, the study suggested the influence of costing techniques on the performance of business organizations in Nigeria and the effectiveness of employee motivation on the performance of private firms in Nigeria are suggested areas for further studies.
1.1 Background of the Study
According to Munaneza (2001), there are groups and associations that have organized themselves to influence the supply and demand of the dairy industry sector and these are: the Nigeria National Dairy Farmers’ Association, the Nigeria National Dairy Traders’ Association, and the Nigeria Dairy Processors’ Association/groups. These groups influence standards as well as market conditions in terms of supply and demand for the products. However, the milk and dairy products market in Nigeria has been liberalized since early 1990s whereby the prices of both raw milk and its products are determined by market forces to a larger extent. This has led to free participation of the private sector and also increased informal marketing of milk. The new Dairy Industry Act of 1998, however, provides for the processing and marketing standards and regulations for dairy products.
Knowledge of costs is important to understand what cost control is. While conducting research, the author came across several definitions of costs. In the 1970s costs were defined as the monetary values of the resources that have to be sacrificed for the production (Van der Schroeff et al., 1970). Some decades later the definition of cost was reconfirmed in the works of Bilkerbeek (1992), van‘t Klooster (1992) and Horngren (2005). First Bilkerbeek states that costs are the resources sacrificed during the production process. These resources typically are raw materials, labor and machines.
The Monetary value of these resources is called costs (Bilkerbeek et al., 1992). Secondly, van‘t Klooster states that as a company tries to maximize its profit it sacrifices resources. With these resources products are made, which are sold to the customers to satisfy their needs. The resources used to make the products are costs. Costs are usually measured in monetary units. Costs are therefore the monetary value of the resources sacrificed during the production process. The fact that costs are measured in money does not mean that costs are equal to payments (van‘t Klooster et al., 1992). According to Horngren a cost is a sacrifice or giving up of resources for a particular purpose, frequently measured by the monetary units that an organization must pay for goods and services (Horngren et al., 2005).
In management accounting, cost accounting establishes budget and actual cost of operations, processes, departments or product and the analysis of variances, profitability or social use of funds. Managers use cost accounting to support decision making to cut a company’s costs and improve profitability. As a form of management accounting, cost accounting need not follow standards such as GAAP because its primary use is for internal managers, rather than outside users, and what to compute is instead decided pragmatically (Lucey, 1996).
In most cases the main goal of a business is making profit. A business may have other goals but if they do not make profit in the business then they will have to end the business. The easiest way to explain profit is the income a company earned in a certain period of time. There are two types of profit namely gross profit and net profit. Gross profit is not the actual profit of a business and it is found by deducting the cost of goods sold from net sales. Thus, net profit is considered as the actual profit retained by a business and it is actually the difference between the revenue earned by the company and the expenses incurred (Harngren, 2004).
Cost management is a key business management function as understanding of cost behavior can also support decision-making across the full range of business operations, from project selection through pricing, alternative use of resources to retirement of products at the end of their life cycles. New and highly sophisticated approaches are being developed to enhance the decision-support value of cost analysis for improved business profitability. Activity-Based Management is an analytic application that models business processes to determine cost, profitability and drivers. With this solution, organizations can make informed decisions that streamline processes, deliver revenue growth and reduce costs across the organization. By providing process, cost and profitability insights, Activity-Based Management reveals how unprofitable customers may be destroying up to 400 percent of the net profit (Malcom, 2005).
But Halachmi & Bouckart (2005) argued that costing technique involves using the cost analysis information in different areas such as project, inventory cost, operations, process and overall business performance management. Total cost management (TQM) is an approach to managing cost over the entire life cycle of an enterprise, project, program, facility, product or service. Costing technique focus starts from project selection, planning and initiation stage. Costs are then managed through all stages till retirement through cost estimating, economic analysis, cost engineering, program/project management, planning and scheduling, monitoring cost and schedule performance and Change control .
The increasingly competitive business environment required that cost behavior be analyzed in a way that can help business decisions in such areas as market-oriented pricing and alternative use of production resources. New approaches should be developed to provide better decision support information. Cost accounting itself came to be known as management accounting to reflect the new emphasis (Lucey, 1996). Standard costing involved establishing standards for all cost elements and analyzing the specific reasons for actual costs deviating from these standards. The analysis helped pinpoint such specific performance factors such as: Inefficient use of materials or equipment, higher than budgeted material prices or labor compensation, and lower productivity of operations causing an under-recovery of fixed overhead costs (Harngren, 1987).
Activity based costing involved analyzing costs of all activities involved in operations, including such overhead activities as waiting for clear instructions or talking to customers on different issues. With a clear idea about the costs being incurred by different activities, it becomes easier to select areas for focused cost-reduction attempts that improve business profitability level (Malcom, 2005).
Currently the milk market in Nigeria is mainly in two categories namely: the formal and informal sector. The formal sector markets pasteurised milk and other dairy products. The informal sector mainly markets un-pasteurised milk because the Public Health Act that prohibits its sale is not enforced (Munaneza, 2001). However, the enforcement of the Act is expected to begin in 2003 and this will prohibit the sale of un-pasteurised milk, thus boosting sales of pasteurised milk. The formal sector distributes and markets dairy products through vendors or direct delivery to groceries, supermarkets, hotels, restaurants, schools and hospitals. Some dairy co-operative societies and agents are also involved in marketing of fluid milk while farmers and/or agents market mainly un-pasteurised milk.
The Paramount Dairies Ltd produces a range of products including pasteurised and UHT milk, butter, ghee, yoghurt, cheese and ice cream. The Dairy Co-operative Societies and other milk processing and cooling plants in various parts of the country like; G.B.K Diary product, Ramilk Ltd located in Mbarara, Bushenyi Dairy Co-operative Society Ltd and Umoja Farmers Ltd. Located in Kampala, among others have try divested their production. However, a number of existing small and medium scale dairy processors want to expand their operations but are limited by financial capital, equipment, technology and/or expertise. Paramount Dairies Ltd is found in Lugazi Area, Mbarara Municipal as the Dairies Ltd use process costing method while performing activities at the plant and it was in researcher’s mind whether costing influences on the profitability level of any business organization.
Sokoto Growers Tea Factory initiated a cost control scheme in 2005; its financial performance slightly improved however this has not been sustainable, Mugarura, F. 2007. According to management, this was done through restructuring and downsizing of its staff in order to reduce operating costs for improving the levels of returns. Several changes were also made during the time in different areas such as mechanics and transport department through privatizing transportation of green tea to private vehicle operators.
According to the managing director of Paramount Dairies Ltd, the company was in financial crisis despite the process costing method used by Company as he said that “We are still operating although we have not got any assistance from the Government” New Vision (Article, May 2005). Paramount Dairies Ltd believed to improve its profitability level through the use of different costing methods such job costing, process costing and batch costing method depending on their activities (John Anglin, Managing Director, Paramount Dairies Ltd, 2010). It was therefore questionable as to whether Paramount Dairies Ltd has applied appropriate cost control procedure for improving its profitability level and that’s why the study was carried out to ascertain this.
The major objectives of the study was to examine the relationship between costing techniques and business profitability taking a case study of paramount Diaries ltd in Sokoto Metropolis.
Other specific objectives include:
The study was guided by the following research objectives:
- To find out the costing technique used at paramount Diaries Limited.
- To establish the influence of costing techniques on business profitability at paramount Diaries Limited.
- To recommend the possible ways for improving profitability level of paramount Diaries Limited
The following research questions were used during the process of undertaking the study:
- What type of costing technique is used at paramount Diaries Limited?
- What is the influence of costing techniques on business profitability at paramount Diaries Limited?
- What are the possible ways for improving profitability level of paramount Diaries Limited?
In terms of content scope, kind of costing technique used at paramount Diaries Limited, the influence of costing techniques on business profitability at paramount Diaries Limited, and possible ways for improving profitability level of paramount Diaries Limited.
The study was to find out relationship between costing techniques and business profitability at Paramount Diaries ltd. Paramount Diaries ltd is located in GRA capital city area of Sokoto Metropolis, Sokoto The researcher choose Paramount Diaries ltd because the organization used costing methods but its profitability level seems to have not improved as some times there is delay in payment of milk suppliers as well as salary of employees (John Anglin, Managing Director, Paramount Dairies Ltd, 2010).
The study also collected information relating to period of six years. The year (2009– 2015) was chosen since the company has been trying to minimize its costs as profitability level considered crucial in the organization. Still the time period of five years was long enough which helped the researcher to establish the relationship between the study variables.
1.7 SIGNIFICANCE OF THE STUDY
The study findings may be significantly important in the number of ways including:
The research findings was helpful to benefit Paramount Diaries ltd as may highlight areas that will badly need cost control and the ability for improved company’s performance in terms of profitability level.
The study findings are further hoped to help other organizations other than Paramount Diaries ltd on how to effectively manage their organizational costs and boost performance in their daily activities.
The study may further act as a material for scholars and academicians researching/interested in studying costing techniques and profitability level since it will provide information in relation to such.
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